Hey, guys, welcome to Benzinga Yield Report for February 18, 2025. We have all the madness of Valentine’s Day behind us, but the political news and market noise continue. Even with a market holiday and a long weekend, we are staying focused on our goal: building a total return portfolio where as much of the return as possible is paid upfront in cash. Market fluctuations happen, but we want cash flow to provide stability, whether we’re growing wealth or generating inflation-beating income.
The market remains in a strong uptrend. Weekly charts show a clear long-term positive trend in stocks, despite short-term volatility. The key is staying invested rather than attempting to time the market, which can lead to missing significant upswings. We prefer to focus on big signals and avoid short-term noise.
Bonds, however, are not enjoying the same enthusiasm. Several attempts at an uptrend have failed, and investor sentiment remains mixed. Historically, the current divergence between stocks and bonds has led to major market corrections in 1998-99 and 2006-07. Whether stocks correct sharply or bonds rally remains to be seen, but this situation will not last forever.
Economic concerns persist, but it’s not all doom and gloom. The bottom 20% of income earners are struggling, but the broader consumer economy is still spending. Job markets remain healthy, businesses are investing, and industrial production is picking up. A mix of tariffs, tax policy, and reshoring trends could provide significant opportunities for small and mid-sized businesses in the U.S.
Inflation remains a central issue. While official inflation numbers have moderated, key areas like food, housing, and energy continue to show price pressures. Consumer sentiment reflects frustration with rising costs, even as wage growth has helped mitigate some of the impact. The Federal Reserve remains cautious, balancing the risk of cutting interest rates too soon against the potential for prolonged economic stagnation. Historically, inflation spikes have led to aggressive monetary tightening, and policymakers are wary of repeating past mistakes.
The recent uptick in inflation has sparked renewed debate over whether the Fed should adjust its stance. If inflation remains sticky or accelerates, rate cuts could be delayed, potentially creating headwinds for equity markets and interest-sensitive sectors. Conversely, if economic growth slows significantly, the Fed may be forced to ease policy despite inflation risks. This balancing act makes it critical for investors to position portfolios with a mix of income-generating assets and defensive holdings.
Tariffs remain a major uncertainty. If fully implemented, Trump’s tariff hikes would push U.S. tariff rates to their highest levels since 1910. Historically, such moves have led to inflation and economic stress. Market fears surrounding monetary policy changes, particularly regarding a potential new Fed leadership, are also significant. Inflation remains sticky, and if it worsens, interest rates could rise rather than fall, creating challenges across markets.
Interest rates have risen dramatically, but in a historical context, they are not yet excessive. The yield curve inversion is a red flag. Historically, yield curve reversals tend to precede major market corrections. The high-yield bond spread remains at levels that indicate excessive complacency, reminiscent of 1999 and 2007. This suggests that while the economy is currently strong, risk is elevated, making this a time for caution rather than aggressive buying.
Our portfolio strategy remains focused on high-yield, cash-flow-generating investments. Large-cap stocks and indexes are not attractive in the current environment. Instead, we emphasize:
- Redwood Trust (RWT): Trading at a discount to book value with an 11%+ yield. Redwood specializes in purchasing, securitizing, and managing jumbo residential mortgages, with a growing presence in bank-originated loan purchases. With banks pulling back from direct mortgage lending, Redwood is stepping in as a key liquidity provider, securing long-term profitability in an underserved market.
- Franklin BSP Realty Trust (FBRT): Yielding nearly 11% and trading below book value. The REIT primarily focuses on multifamily and commercial mortgage loans with conservative underwriting standards. The portfolio consists of 62.9% loan-to-value senior loans, with a high concentration in growing Sunbelt markets. Their ability to adapt to market trends ensures solid risk-adjusted returns.
- CBRE Global Infrastructure Megatrends Term Fund (MEGI): A closed-end fund offering an 11.9% yield, trading at a 10% discount to NAV. MEGI invests in critical global infrastructure, including energy pipelines, renewable power projects, toll roads, airports, and shipping terminals. This diversification provides resilience against market fluctuations and benefits from global economic growth.
- Western Union (WU): An 8.7% yield with a stable earnings base. The company is transitioning toward digital remittance services while maintaining a global presence in physical locations. Western Union’s network of retail partnerships ensures steady revenue, while its digital expansion improves long-term growth potential. Despite slow growth, its strong cash flow and low leverage make it a reliable income stock.
- AGNC Investment Corp. (AGNC): A 13.7% yield, focused on agency-backed residential mortgages. AGNC maintains a disciplined approach to leverage and hedging strategies, making it the most attractive agency mortgage REIT in the current environment. With the potential for rate cuts later this year, AGNC’s book value could appreciate, further enhancing total returns.
- InfraCap BDC Income ETF (BNDI): A new addition from Jay Hatfield’s team, providing an 8% yield through a diversified portfolio of corporate bonds. Holdings include bonds from Lincoln National, Plains All-American, Franklin BSP Realty Trust, New York Mortgage Trust, and more. The ETF focuses on discounted bonds with strong credit fundamentals, ensuring stable income while minimizing default risk.
Overall, we remain cautious on large-cap stocks and broad indexes. Our focus is on cash-producing assets, embracing volatility as an opportunity to buy high-quality income-generating investments at attractive valuations. The coming year will be turbulent, but with the right approach, it could also be one of the most profitable. Thanks for being a part of the adventure—see you next week!